Is a National Brand for Pot a Pipe Dream?

An ex-Microsoft employee has plans to create a national marijuana business. Can the barriers standing in his way be scaled?

Jamen Shively spent six years at Microsoft as corporate strategy manager. Now, he has a new venture: legal marijuana.

Shively recently announced plans to create the first national brand of retail marijuana for both medical and recreational users. He has purportedly already acquired a Washington-based company that operates two Seattle medical marijuana dispensaries and is close to purchasing others in California and Colorado.

He's also calling for the U.S. government to legalize the trade of marijuana with Mexico but his plans for the total legalization of the substance in the U.S. remain unclear. Pot remains illegal under U.S. federal law as well as international trade rules.

The dream, Shively stated, is to one day control 40 percent of the global marijuana market. "Let’s go big or go home," he said. "We're going to mint more millionaires than Microsoft with this business."

But before he starts to grow his fortune will his dream of a new pot empire go up in smoke? Here are a few of the hurdles facing Shively and Mary Jane as they set off on this grand new venture.

1. Legality

The first major flaw in the business concept is that it seeks to establish a business that, under current U.S. law, is illegal. As such, the business has a seemingly massive hurdle to surmount prior to beginning operations: it must first make pot legal in the U.S.A.

A few years ago I was involved in a failed, or significantly stalled, business that sought to bring Las Vegas-style gaming to your mobile device. From the ability to purchase lottery tickets to apps that actually allowed the user to game on their smartphone the potential revenues stretched into the billions per year. The problem? It was, and remains, illegal. And although the business had every intent to have gaming on smart phones legalized it never did. In large part this was because there was no concrete plan to change the regulatory system to legalize the same to truly effectuate the business plan. Sound familiar?

The same issue faces Shively's planned pot business. How does he intend to legalize marijuana in the U.S.? To date, no concrete plan has been announced. Presumptively there is a recognition that they must first get a bill introduced by the Republican-controlled Congress, passed by that same body and then passed by the Senate before heading to the Democratically-controlled White House.

But does anyone think that a party still reeling from its inability to re-capture the White House that has seen a dramatic shift to the right in its core leadership in the past few years (Hint, maybe they can't see the forest for the extremely right-leaning trees) will be the party that wants credit, or the blame, for legalizing pot?

From a fiscal perspective, the argument exists that the tax revenue generated would be significant and would assist in balancing the budget. But how could they justify legalizing a controlled substance to their base while preaching moral superiority? They can't. They won't.

So the most evident problem with this new venture is that it is illegal and in the current political climate, no matter the lobbying dollars involved, is unlikely to change the laws sufficient to allow this business to ever launch.

2. Incurring Costs for Your Competition

But lets assume for a moment Shively gets over this first hurdle without spilling his bong water, he will need to do so on his own lobbying dime. Then, having just incurred a massive upstart cost, his sure-to-follow competitors will be the likely beneficiaries.

One of my favorite shows on television is ABC's Shark Tank. Each week aspiring entrepreneurs pitch their products to a panel of wealthy and experienced venture capitalists. If they like the product (i.e., believe they can make money from investing) they will make an offer to buy some or all of the product or company. Within this context, one of the questions most frequently ask is do you have a patent or other intellectual property protecting the product or idea? Why? Savvy investors like Mark Cuban and Kevin O'Leary (aka Mr. Wonderful) want to know that if they invest in a product the product's concept is protected to the point that they will have a monopoly on supply to satisfy the demand for the product for a period of time. In short, they are the only ones who can sell it so they are the only ones who can make money off of it.

No such monopoly will ever exist for Shively's venture. In short, even if he gets it legalized overnight there will be a landslide of new and recently legalized pot products the likes of which have not been seen since the repeal of prohibition and its affect on the liquor industry.

So Shively and Shively alone may incur the costs to bring the product to market, but he will do so to the benefit of the new industry that will be created. One must then ask with these significant sunk costs will he be able to compete on price in the very marketplace he has created?

3. Old School Competition

There is another logical fallacy that has largely been ignored by proponents of legalizing marijuana. One of the principal arguments in favor of legalization is that it will increase tax revenue and decrease the illegal sale of the substance. Does anyone really think that legalizing pot is going to stop the illegal distribution of the substance overnight?

You can buy cigarettes in a store. Why then were the cigarettes sold out of a trunk in the iconic movie Goodfellas so popular? Because they were cheap. They were tax free.

Drug dealers aren't going anywhere, at least not as a result of the legalization of one of their signature products. Criminals, yes. Stupid, not really. They know their markets quite well. You could even argue they get them hooked. So if pot is legalized, regulated, and taxed how then will they compete? By selling it cheaper than the tax-ladened legal stuff. Their crime may change from possession with intent to distribute to a tax or regulatory matter, but so long as there is a demand for cheaper, tax-free product there will be a supply. And that supply will again be in direct competition with the legal market.

4. No Trademark Protection

Lastly, you knew it was coming. After all I am a trademark attorney. The last major issue with Shively's business plan to build a national pot brand that I see is this: He can't protect the brand as a trademark. What you might say? I'll say it again, you can't protect the brand as a trademark!

How are you going to build a national brand if you yourself cannot preclude others from using your "trademark"? What do I mean?

The Trademark Act of 1946 prohibits the registration of a trademark that is scandalous or immoral. This is often extended to trademarks for products which are illegal meaning that even if the trademark itself is otherwise innocuous the Trademark Office will, nonetheless, refuse registration and protection of the same if it is used in connection with an illegal substance.

Perhaps the most famous trademark that will most likely be cancelled under this statute is that of the Washington Redskins. For years different groups of Native Americans have challenged the continued registration of the trademark on the grounds that it is, effectively, a derogatory racial slur. In previous challenges a technicality or some other issue has always saved the registrations. But it is widely held that all such technical hurdles have now been erased and that later this year a challenge that began over a decade ago will finally spell the end for the protection of the Washington Redskin's federal trademark.

Returning to the subject of creating a national pot brand, it is highly unlikely that the U.S. Patent and Trademark Office is going to change its stance anytime soon in regard to the registration of trademarks used in connection with marijuana. Even if made legal the Commissioner could still deny protection under the belief that such marks used in connection with pot are immoral.

In this regard, how do you create a national brand without trademark protection? Securing trademark rights in your brand is what grants you the exclusive right to use a brand. In the absence of those rights others may freely use your trademark on their goods, on their pot. Then your not promoting and building your brand, your simply promoting everyone's use of a common name on a product. And any way you slice it, that is a big problem.

So can Shively build the first national brand for pot? Perhaps. But until he comes up with a concrete plan to address the issues above his pipe dream may simply go up in smoke.